A “kind of economic miracle” is how the American economist Paul Krugman, Nobel Prize winner in 2008, described Portugal a few weeks ago. In ten years the country has achieved an achievement.
It went from a dying country to one of the most prosperous European economies, with a growth rate of 6.8% in 2022 and 2.2% in 2023, while the European average was around 0.6%. Behind this “miracle” is an increase in attractiveness through various tax statuses that are intended to convince individuals.
“Using the leverage of personal income tax”
Some personalities were not mistaken: Florent Pagny, Isabelle Adjani, Philippe Starck and even the heirs of Claude François settled in Portugal to benefit from tax exemption on their royalties.
In their wake, many artists or startups have done the same. But this also applies to pensioners and employees who are considered to have “high added value”. They all benefit from special statuses that allow them to significantly reduce their tax burden. “The idea was to use the leverage of personal income tax rather than competing with low corporate tax rates like some other countries,” explains researcher Rita de la Feria, a tax law specialist at the University of Leeds in the United Kingdom. A snowball effect emerged. When people came to Portugal, they realized how beautiful life was, and that was the catalyst for a whole bunch of actors to become interested in Portugal.”
The origin of the development of this series of tax exemptions was the 2008 crisis that devastated the country. Consumption stops, borrowers can no longer repay the banks, and unemployment reaches a record rate of 16% in 2013. Above all, “Portuguese banks had a real estate portfolio of six billion euros in 2010,” explains Carlos Vinhas Pereira, president of the Franco-Portuguese Chamber of Commerce. Therefore, a way to sell these shares had to be found. Under the leadership of the “Troika” (International Monetary Fund, European Commission and European Central Bank), the country then took 130 drastic measures to revive the economy. And at the same time, the socialist government decides to attract foreign capital by targeting individuals in the hope of, among other things, selling off this huge real estate holdings.
RNH for Europeans and “Golden Visa” for others
The first to answer the call will be pensioners. And for good reason: With the non-habitual resident status (RNH), all former European private employees are completely exempt from tax for 10 years, provided they live in the country for at least half of the year. A blessing that comes with a lower cost of living in Portugal than in France. Result: A first wave of French people arrived in 2013.
They are quickly followed by another category of expatriates: workers whose occupation also qualifies for NHR status. These are higher intellectual professions, artists, researchers, doctors, engineers, etc. They benefit from an income tax rate capped at 20% for ten years. In addition, there are complete exemptions for artists from their royalties and for entrepreneurs who pay dividends. Jean-Luc Paulhe, head of the company Envie de Lisbonne, which was supposed to help the French settle in Portugal, could see the impact of these measures: “Among my customers there were many entrepreneurs in their thirties who had just sold their companies.” , which offered them dividend compensation over several years. We had a lot of families with that profile.”
Among the personalities who have chosen Portugal for the RNH title are the actress Isabelle Adjani and the musician Florent Pagny. (FRANCK CASTEL/MAXPPP and JULIEN DE ROSA / AFP)
Non-European individuals wishing to invest in Portugal are offered a different status. Until recently, a “Golden Visa” granted them a renewable residence permit for five years on the condition that they invest in real estate worth at least 250,000 euros or set up a business in the country. To benefit from this status, a stay of seven days a year in Portugal was sufficient. Given the success of the operation, which brought the Portuguese state 5.5 billion euros in the first eight years, the investment costs were eventually increased to 500,000 euros. Brazilians, Asians and North Americans were the main beneficiaries of this program, which has been permanently suspended since 2023.
A wealth that is diverted from that of the countries of origin
Within a decade, Portugal attracted a new population. It is estimated that the number of French residents has increased from around 15,000 in 2010 to over 80,000 currently. The latest wave of arrivals followed the health crisis. The massive development of teleworking in certain professions has led to some households relocating, including to Portugal.
The phenomenon is beginning to alarm researchers who have studied the impact of these deviations on the state budget. At the University of Leeds, Rita de la Feria was surprised by the results of the study she conducted with her colleague Giorgia Maffini.
“Because the people who emigrate are those with the highest incomes, their emigration impacts the resources of their country of origin. With significant consequences, even if the number of emigrants is small, because these people are among those who bring in the most in terms of taxes.”
Rita de la Feria, researcher at the University of Leeds
at franceinfo
“For the United Kingdom, for example, we calculated that 140,000 departures would be enough for the country to lose billions of euros,” explains the researcher. A calculation that would also apply to other European countries. According to the researcher, this “tax dumping” by individuals could have as devastating consequences for public finances as the practice carried out in other European countries such as Luxembourg or the Netherlands for corporate tax. However, this aggressive tax policy is implemented in Portugal, but also in other countries such as Greece, Croatia and Spain.
Individuals were followed by companies, particularly those in the CAC40
However, by attracting individuals, Portugal won its bet. Not only did numerous individuals come, but companies also followed, and last but not least: 38 of the 40 CAC40 companies are now based in the country. This is particularly true for BNP Paribas, whose number has increased from a thousand employees before 2010 to 9,000 today.
Portuguese tax conditions for a company are relatively similar to those in France, but the country has another advantage: low remuneration. “The minimum wage is a little less than 900 euros gross per month, with lower contributions than in France,” notes Laurent Marionnet of the Luso-French Chamber of Commerce in Lisbon. Portugal therefore offers a well-educated workforce, often trilingual French-English, all at low cost. Enough to appeal to large groups. “We call this 'near-shoring',” sighs a trade union representative from BNP Paribas, “i.e. local relocation.” The majority of workers in Portugal do not work for the domestic market, but for the European region. On the other hand, we see that certain professions are disappearing or declining in countries like France or Germany.”
After years of rapid economic growth, Portuguese workers are facing a new problem. The arrival of wealthy classes has doubled property prices in the Lisbon, Porto and Algarve regions. With current salaries, it will therefore be impossible to find accommodation, which BNP Paribas is aware of, according to an internal memo received by Radio France's investigative unit.
“Most employees receive between 800 and 1,200 euros net per month. Currently, with this salary it is only possible to rent a room in Lisbon.”
An internal note from BNP Paribas
consulted by the investigative unit of Radio France
“And even outside the capital,” we read in this note, “the rent for a modest accommodation costs around 800 euros.” This situation pushes workers to demand better salaries and leads to large companies hiring young people, who don't go to school and who usually only stay for a maximum of three years before looking for a better-paying job.
Any regression depends on the results of the next elections
But the situation is changing. While Portugal had a debt-to-GDP ratio of more than 130%, this is expected to fall below 100% in 2024. Due to the economic successes there, the government is in the process of reducing its taxes. advantageous. The “Golden Visa” no longer exists. Non-habitual residence (NHR) status for pensioners has ended. As for “high added value” assets, the list of candidates is now limited to teachers and researchers. A new status allows you to tax only half of your income up to a limit of 250,000 euros per year in the event of settling or returning to Portugal.
However, these measures currently in preparation will have to wait for the adoption of the outcome of the political crisis that is currently sweeping the country. After ministers were implicated in cases of favoritism, the government actually resigned. The next one will be elected in March 2024. Only then will we know whether the country is really changing course in terms of tax policy.
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